DST 1031 Pros and Cons: What Every Real Estate Investor Should Know

A Delaware Statutory Trust (DST) lets several investors own fractional interests in a property, or a group of properties, managed by a sponsor. Under IRS Revenue Ruling 2004-86, a properly structured DST interest counts as real property, so it can be replacement property in a 1031 exchange.

DSTs work well for some investors and poorly for others. Here's a balanced look.

The pros

No management. The sponsor handles leasing, maintenance and operations. For investors who are done being landlords, that's the main appeal.

Diversification. You can split your proceeds among several DSTs, spreading your money across property types, tenants and markets.

Access to larger properties. DSTs often own large apartment communities, industrial buildings or net-leased properties that most individual investors couldn't buy on their own.

Help with timing. DST interests can usually be bought quickly. Some investors identify a DST as a backup in case a direct purchase falls through, or use one to place leftover funds.

Help replacing debt. Many DSTs carry financing, which can help you replace the loan you paid off when you sold.

Estate planning. Under current law, your heirs generally receive a stepped-up basis when they inherit, which can wipe out the deferred gain. That's true of any property you hold until death, not just DSTs.

The cons

Illiquid. Your money is typically tied up until the sponsor sells, often five to ten years. There's usually no practical way to cash out early.

No control. You don't decide when to sell, refinance or make changes. The sponsor does.

Distributions aren't guaranteed. Many DSTs pay monthly distributions, but they depend on the property's performance and can be reduced or stopped.

Market risk. A DST is still real estate. Vacancies, tenant problems and market cycles affect it like any other property.

Fees. Sponsor fees, selling commissions and other costs are built in and reduce your return. Read the offering documents closely.

Accredited investors only, in most cases. DSTs are securities, sold through licensed representatives, and most offerings are limited to accredited investors.

Your next exchange depends on the sponsor. When the DST sells, you can do another exchange, but the timing is set by the sponsor's sale, not by you.

Is a DST right for you?

That's a question for your financial and tax advisors. APX 1031 doesn't sell DSTs or recommend investments. If you decide to buy one, we handle the exchange the same way we would for any other replacement property, and the same 45 and 180-day deadlines apply.

Next step

If you're considering a DST, reach out before your sale closes so we can get your exchange set up and make sure your identification is in order.

APX 1031 is a Qualified Intermediary. We don't provide tax or legal advice; talk with your CPA or attorney about your situation.